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If You Answer Yes to These Questions, It's Time to Cut Up Your Credit Card

Elizabeth Aldrich, The Motley Fool

Answer these questions to find out if it's time to cut up that credit card in your wallet.
Image source: Getty Images.

Woman cutting her credit card with scissors.

By the end of 2018, our collective credit card debt in America reached over $4 trillion for the first time ever, according to the Federal Reserve.

Credit cards make spending convenient, and who doesn't love being rewarded for making purchases? Unfortunately, these inconspicuous pieces of plastic can send you tumbling down a financial hole if you're not careful. If any of these questions have you nodding your head yes, it might be time to toss that credit card.

1. Have you paid your credit card bill late on multiple occasions?

Payment history is the most important factor in calculating your credit score, making up 35% of your FICO® Score. A missed payment can seriously damage your score, raising a major red flag to potential creditors. That slip-up will then stay on your credit report for seven years.

Continual late payments jeopardize your relationship with your current creditor -- and your bank account. Late payment fees start getting tacked onto your bill -- up to $27 for your first late payment and up to $38 on any subsequent late payments. These late fees can add up quickly, so consider other payment methods if you're a habitual late payer.

2. Do you have missed payments that are more than 30 days overdue?

When your missed payment is 30 days late, the credit card company will report your delinquency to the credit bureaus and charge a late fee. It's reported again at 60 days, and then the credit company can start charging a penalty APR on your existing balance. Your interest rate will skyrocket, often up to 30% or more, making it even harder to get out of debt.

Your missed payment is reported again at 90 days, 120 days, 150 days, and 180 days. At 180 days late, the account is closed and can be sent to collections, which will have a disastrous impact on your credit. By this point, you've likely racked up so many fees that the debt has become unmanageable.

One late payment is enough to signal that credit cards might not be right for you, but if you're letting missed payments go for 30 days or more, it's definitely time to get rid of your credit cards.

3. Do you only make the minimum payment each month?

Carrying a credit card balance leaves you with expensive debt. One popular rewards credit card comes with an APR ranging from 19.24% to 26.24%, which is high enough to land you in severe debt over even small balances if you don’t pay them off in full. By only making the minimum payment, your money is mostly going toward interest instead of paying off the balance -- trapping you in debt even longer.

Let's say you have a balance of just $3,000. If you only make the minimum required payment, it will take you over 10 years to pay off your balance, and you'll spend an additional $2,400 in interest and fees. If you can't pay your balance in full each month, a credit card might not be the best idea.

4. Are you ever unable to afford your minimum monthly payment?

Missing your monthly payments is terrible for your credit and racks up fees and extra debt. If your credit card balance is so high that you can't afford your monthly payments, it's time to consider other options before you end up in bankruptcy.

Seek out help if you can't afford your minimum monthly payment. Credit counseling with a non-profit organization is often free or very affordable. They can help you come up with a debt repayment plan that involves negotiating lower interest rates, closing your accounts, and paying off your debt on time.

5. Are you buying things with your credit card that you wouldn't buy with cash?

When using credit cards, we tend to overspend or make purchases we wouldn't normally make with cash or a debit card. This is because we don't see the immediate effect on our bank account. If you find yourself falling victim to this disconnect, you should consider using a different payment method to keep your spending under control.

6. Do you rely on your credit card to pay for essentials?

Credit cards should never be used for making ends meet. Using a credit card to pay for groceries or household expenses because you get cash back is one thing. However, if you can't afford to cover your essential living costs, it's time to start looking at financial solutions that don't involve such high interest rates.

Paying in cash is ideal, so look into picking up a side gig for extra money or ask friends and family for a loan first. If you really need to borrow, personal loans might offer a more favorable interest rate than credit cards. Look into options at your local credit union, as credit unions tend to offer lower interest rates on loans and credit cards. Finally, you could also consider a credit card with a 0% introductory APR, but only if you’re able to pay it off in full before the introductory period ends.

7. Do you pay an annual fee for a credit card you rarely use?

The best rewards credit cards are worth the annual fees if you use them often. However, if you aren't getting a lot of rewards or benefits, it's time to close the card to avoid paying another annual fee. Before you do that, ask if you can downgrade the credit card to a version with no annual fee. Because it’s a product change and you aren’t closing the account, downgrading your credit card will maintain your debt-to-credit ratio and the age of the account, protecting your credit score while getting rid of the annual fee.

If downgrading isn't an option, it may be in your best interest to close the credit card account altogether. Closing a credit card can cause a small dip in your credit score, but as long as you are managing the rest of your finances, your credit score will recover.

As tempting as it may be to put your purchases on plastic, avoiding high interest rates and revolving debt is crucial to your financial health. If having a credit card is hurting your finances, it's time to get rid of it.

The Motley Fool owns and recommends MasterCard and Visa, and recommends American Express. We’re firm believers in the Golden Rule. If we wouldn’t recommend an offer to a close family member, we wouldn’t recommend it on The Ascent either. Our number one goal is helping people find the best offers to improve their finances. That is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.